Market Overview

What's The Impact Of Margin Hikes On Commodities ETFs?


Anyone that pays even scant attention to financial markets by now knows that the CME Group (NYSE: CME) has been wielding its margin-raising sword with almost wanton abandon in the past couple of weeks. Five margin increases on silver in the past two weeks mean the initial margin requirement for silver is now $21,600 compared with $11,745 in late April.

Of course we cannot forget to mention that as of the close of business yesterday, traders are now looking at a margin requirement $6,250, up from $5,000 for existing futures position on West Texas Intermediate Crude and $8,438 up from $6,750 on new futures positions.

So what is the impact of margin raising on commodities ETFs and ETNs? Excluding the recent hikes on silver margins, which CME contends did not force prices down, the answer may surprise and may not be to the exhange operators' liking. That is assuming the exchanges are in fact raising prices to force commodities prices down.

Let's look at some other margin increases to see what the impact on various exchange traded products has been.

1) Ipath DJ-UBS Cotton TR Sub-Index ETN (NYSE: BAL): IntercontinentalExchange (NYSE: ICE) raised cotton margins in November and BAL proceed to plunge roughly $20, but the ETN reclaimed its November peak by mid-December. ICE raised cotton margins again in February, but cotton and BAL proceeded to move to record highs. BAL has plunged since then, but it's hard to say that margin hikes are the sole reason for the ETN's woes.

2) Teucrium Corn ETF (NYSE: CORN): Corn is one of the most volatile commodities out there, so margin hikes here aren't stunning revelations and we did see one earlier this year. CORN is off 4.4% in the past month, but the demand outlook for corn remains so robust that margin increases here, unless they come in droves a la silver, may not do much to stem the commodity's rising tide.

3) US Oil Fund (NYSE: USO): Prior to this week's margin increase, crude oil margins were last hiked on March 4. Oil and USO both fell after that, but after bottoming in mid-March, USO proceed to tack on more than 10% running to its April high.

4) ETFS Physical Palladium Shares (NYSE: PALL): CME raised palladium margins on December 17 with nary an impact on PALL. In fact, from mid-December through late February, PALL gained almost 20%. The ETF has since plunged and the most recent slide can arguably be tied to the silver margin increases, but there is no empirical evidence to suggest palladium has faltered solely because of higher margin requirements.

Posted-In: Long Ideas News Short Ideas Specialty ETFs Futures Commodities Events Global Best of Benzinga


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